Dell CFO makes money by saving money

The PC giant relies on efficiency to boost profits.

January 2, 20024:43 PM PST

A penny saved is a dollar earned.

That would appear to be the motto of Dell Computer chief financial officer
James Schneider, who is proud of how the PC manufacturer makes money by
saving it. Schneider talks a lot about boosting income by cutting costs,
even as some rivals struggle to squeeze a profit out of selling PCs.

He also believes this approach will help Dell meet its original
third-quarter earnings estimates, despite a profit warning in early October that cut
projected revenue growth by 3 percent. Even though Dell joined Apple
Computer, IBM, Intel and other computer industry heavyweights issuing
warnings about the third quarter, Schneider is confident PC growth will
remain strong.

Cheerful but serious, Schneider is a true believer in Dell's sales model of
selling systems
directly to the customer. After all, it is cost-effective,
with no dealers to pay and better price management for components.

Schneider spoke with CNET News.com's Joe Wilcox during Dell's recent
DirectConnect conference in Austin, Texas, and later following the
company's surprise profit warning.

CNET News.com: You seemed on track for the quarter during DirectConnect,
but just two weeks later you warned of slower revenue growth. Why?
Schneider: We expected business to start ramping in September, and probably
with the latest information we had when we got to DirectConnect--with less
than half the quarter done but probably no more than 40 percent of the
revenue expectation in at that time--things looked OK. We started to see
announcements from Intel and other people about that time, but still our
business looked OK.

Going forward just a couple weeks made a big difference here, when we had
planned to grow about $800 million or so sequentially in the quarter. Last
quarter it was about $7.7 billion in revenue, and third quarter we were
expected to get between $8.4 (billion) and $8.5 billion. That's like $750
(million), $800 million in growth...It was still growing and even giving
revised expectations of three points less--that's sequential growth of $500
million or $600 million.

You issued the warning during your analysts meeting in Austin. Why
there? Why then?
Going into the analyst meeting and getting into this new era of these new
disclosure rules, it felt like the time to caution people the revenue
wasn't trending to the extent we wanted to.

Do you think, given the new disclosure rules, companies are more
cautious and more likely to issue warnings?
I think even under the old rules, we would have done something because of
the analysts meeting. But I think if we had known
something like this
intra-quarter in the past, as you start becoming aware of this, you would
start putting out information via the analyst community.

I think the rules are going to make intra-quarter conversations like this
more and more difficult, because you either put out some press release or
you really can't say anything else.

Do the new rules make your job more difficult?
In the past, if we had thought there was a little softness, we would have
started to signal that. In the future, you're going to see people have to
make a decision: "Do we see enough information that we put a press release
out, because otherwise we can't say anything to anybody."

In the future when you have bits and pieces of information that you could
have put out in a more balanced way, you're going to say absolutely nothing
or put out a big press release. So I think the disclosure rules, in my
viewpoint, make it really tough to work in the future.

Despite revenue growth lowered to 7 percent from 10 percent, do you
think you can hit your earnings per share (EPS) target?
I'm confident about the original EPS for this quarter. It was supposed to
go up about three cents. Component costs have come down, and we've been
pretty aggressive on pricing.

With component costs declining, we've seen a slight increase in margins. At
the revenue levels we're seeing right now, we can still hit our EPS for
this quarter.

Softness in Europe contributed to problems. But unlike IBM or Intel,
which saw slow sales, Dell attributed the problem to logistics. Could you
explain?
We're still expanding there. We tend to start on a very small base, until
you get some scale. You may see some quick growth, but how well organized
you are and how well you execute really takes some time. That's what we
found out in Europe.

You go from country to country, some places we executed better. In
countries like China and Brazil, we put factories there, as we're very
careful to make sure we're getting our infrastructure in place.

You cut your growth rate
to 30 percent earlier this year, signaling the
boom times are over. Are you concerned about that?
If you look at the total growth, yeah, the growth rate has slowed somewhat.
But we're also going to have $30 billion this year (in revenue). Even what
the analysts project us to do, we'll have about $8 billion in organic,
in-year growth.

On a percentage basis, while that is slower than it's been in other years,
it's still more dollars. And the company still has a lot of opportunity.
Right now we have about 11 percent market share worldwide. When I look at
the penetration into new markets, I say it's fairly optimistic. I don't
think it's realistic (we'll) grow 50 percent again.

There is a lot of concern now about the longevity of the PC market. What
is Dell's take on this?
If I look at what some of the industry analysts say about the industry,
some have growth over the next couple of quarters in the mid- to upper
teens. So while we're seeing a lot of other devices coming out, we're still
seeing good PC demand.

Still, the market is changing as PCs become less profitable. How do you
plan to shift your business to accommodate these changes?
Our desktop business makes a lot of money, and we believe we are a lot more
profitable than anybody else. That business is still good and growing.
We're especially seeing strong growth in portables, and that growth the
last quarter year over year was in the 60 percent kind of range. Our mix is
shifting to those kinds of products and the enterprise products. Half our
products now aren't desktops.

Other companies have had to lower the average selling prices to remain
competitive. Dell appears more immune to that. Why?
Actually, we've consistently been the pricing leader. We've been able to do
that because we are fixated on keeping our cost lower than anybody else in
the industry...If we're the lowest price out there, and we're still making
money, what does that say about the cost?

So how has this focus on managing costs helped Dell's business?
To gain credibility in new markets, we have come at it through undercutting
the cost. We don't feel we need to make the same kind of margins as other
people do to be successful. We can balance our priorities.

Even when I was younger in the company, going back three years, I looked at
notebooks. The notebook at the time had much higher gross margins than the
desktop, but also more dollars because notebooks cost more. So we started
talking, "Gee, why should we not bring the pricing down?" If we could sell
twice as many notebooks, drop the margin by 50 percent, I'd still have 50
percent more profit.

It's not so much you need the profit on a percentage basis but in real
dollars.

You talk about cutting cost, but where does the profit come from? If you
look at Gateway, 50 percent of its income comes from non-hardware sales,
software and services.
It's tough to compare ourselves with Gateway in that respect, because
they're more of a consumer company. We don't just break out all this and
disclose it, but when I look at some of the numbers from our small-business
units, I don't find them totally dissimilar to what Gateway talks about.

What we have reported publicly, in the last quarter we had $1.3 billion, or
about 17 percent of our revenue, outside the box. Again, that is a lot more
profitable than what the box sells for.

I want to sell more services as well. But I think to have a healthy margin
on box as well is still very important to us.

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